Saturday, March 25, 2017

The District Court of Appeal of Florida, First District, recently held that borrowers waive their affirmative defense that a mortgagee did not comply with HUD's "face-to-face" condition precedent to foreclosure when they fail to raise the defense until their closing argument at trial.

The First District also held that even if the borrowers had timely raised compliance with HUD regulations as an affirmative defense, the mortgagee was not required to comply because the property was more than 200 miles from the mortgagee and its servicing branches.

A mortgagee sought to foreclose a mortgage secured by a promissory note issued to the borrowers. The Federal Housing Administration, a division of the United States Department of Housing and Urban Development (HUD), insured the mortgage.

The note provided that in the event of default, the mortgagee may require immediate payment in full of the principal balance remaining due and all accrued interest, "except as limited by regulations of the Secretary in case of payment defaults." In addition, the note stated it "does not authorize acceleration when not permitted by HUD regulations."

The mortgage also contained two nearly identical provisions requiring the mortgagee to comply with HUD regulations before initiating foreclosure.

As you may recall, HUD's FHA regulations, at 24 C.F.R. § 203.604, among other things require a mortgagee, before filing a foreclosure action against a defaulting borrower, to have a face-to-face meeting with the borrower. However, a face-to-face meeting is not required if: "[t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either." 24 C.F.R. § 203.604(c)(2).

The mortgagee's complaint did not allege compliance with any HUD regulation. However, the borrowers did not move to dismiss the complaint due to the mortgagee's failure to allege compliance with HUD regulations, nor did the borrower assert this alleged non-compliance as an affirmative defense.

At trial the mortgagee presented the only witness. The mortgagee's representative did not know whether the face-to-face meeting occurred, but stated that no mortgagee or servicer branch was within 200 miles of the property.

During closing argument, the borrowers for the first time raised the mortgagee's alleged non-compliance with HUD regulations as an affirmative defense. The mortgagee responded that HUD regulations are not a condition precedent to foreclosure and, in any event, the "face-to-face" meeting requirement did not apply here because no branch existed within 200 miles of the property.

The trial court found that HUD's "face-to-face" requirement was a condition to foreclosure here, but that the borrowers failed to timely raise this affirmative defense. The trial court entered final judgment in favor of the mortgagee. This appeal followed.

Initially, the First District examined whether HUD's "face-to-face" requirement was a condition precedent to foreclosure in this case. The First District noted that "[p]rovisions of a contract will only be considered conditions precedent or subsequent where the express wording of the disputed provision conditions formation of a contract and or performance of the contract on the completion of the conditions." Gunderson v. Sch. Dist. of Hillsborough Cnty., 937 So. 2d 777, 779 (Fla. 1st DCA 2006).

The First District distinguished Cross, because here the note and mortgage referenced and incorporated HUD's guidelines, thereby "making them mandatory versus merely persuasive guidelines."

Specifically, the note stated that it "does not authorize acceleration when not permitted by HUD regulations." Further the mortgage twice expressly stated HUD's regulations limit the mortgagee's rights to foreclose. Thus, the Appellate Court held, the mortgagee's "right to foreclose on the mortgage does not arise unless and until these conditions have been satisfied, making the HUD regulation at issue a condition precedent."

The First District next examined whether the borrowers waived their affirmative defense that the mortgagee allegedly did not comply with HUD's face-to-face condition precedent to foreclosure.

As you may recall, Florida requires that "[i]n pleading the performance or occurrence of conditions precedent, it is sufficient to aver generally that all conditions precedent have been performed or have occurred. A denial of performance or occurrence shall be made specifically and with particularity." Fla. R. Civ. P. 1.120.

Here, the mortgagee did not plead compliance with conditions precedent, but the First District found that he borrowers did not timely raise non-compliance as an affirmative defense as they raised the issue for the first time in closing argument at trial.

A defendant's claim that a plaintiff "failed to satisfy conditions precedent necessary to trigger contractual duties under an existing agreement is generally viewed as an affirmative defense, for which the defensive pleader has the burden of pleading and persuasion." Custer Med. Ctr. v. United Auto. Ins. Co., 62 So. 3d 1086, 1096 (Fla. 2010). As the borrowers failed to raise the mortgagee's non-compliance in their answer, affirmative defenses, or at any time before closing argument, the First District held that they waived and failed to preserve the defense.

The First District also found that even if the borrowers had timely raised compliance with HUD regulations as an affirmative defense, the mortgagee "wasn't required to comply because the property was more than 200 miles" from the mortgage, servicer, or any of their respective branches.

Accordingly, the First District affirmed the trial court's judgment in favor of the mortgagee.

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Wednesday, March 22, 2017

The District Court of Appeal of the State of Florida, Third District, recently reversed an award of attorney's fees to a borrower pursuant to section 57.105, Florida Statutes, holding that because the borrower prevailed on her argument that the foreclosing mortgagee lacked standing to enforce the note and mortgage, there was no contract between the parties, and therefore the borrower could not invoke the attorney's fees reciprocity provision of the statute.

The borrower signed a note and mortgage in 2007. The mortgage contained a provision that the lender would be entitled to recover its attorney's fees and costs in enforcing the note and mortgage.

The note contained a special endorsement from the original lender to a national bank, "its successors and/or assigns without recourse." An asset securitization trust mortgagee sued to foreclose in 2009, alleging that it was the holder of the note and mortgage and was thus entitled to enforce the same.

The borrower answered, raising the affirmative defense that the mortgagee lacked standing "because the note was specially indorsed to an entity other than the [mortgagee], and that the [mortgagee] was not the lawful assignee of the note and mortgage." She requested attorney's fees "pursuant to the terms of the agreement between the parties and Florida Statutes, Section 57.105."

As you may recall, under the "reciprocity provision" in subsection 57.105(7), if there is a contract between the parties that entitles one side to recover fees as prevailing party, it is deemed reciprocal in order that if the other side wins, the other side can recover its reasonable attorney's fees.

The case went to trial and the trial court found that the mortgagee lacked standing because there was no evidence of an assignment of the mortgage from the original lender to the mortgagee, and entered judgment in the borrower's favor. The trial court also found that the note was never delivered to the mortgagee and, thus, it never became the holder of the note with the right to enforce it. Finally, the trial court found that the mortgagee was not a non-holder in possession entitled to enforce the note under section 673.3011(1), Florida Statutes, such that the mortgagee could not enforce the note, and reserved jurisdiction to award attorney's fees and costs.

The borrower filed a motion for attorney's fees, arguing that she was entitled to recover them as prevailing party based on the loan documents and subsection 57.105(7), Florida Statutes. In opposition, the mortgagee argued that because it was not a party to the note and mortgage there was no contractual or statutory basis to award fees.

After an evidentiary hearing, the trial court rejected the mortgagee's argument and awarded $41,120.01 in attorney's fees, prejudgment interest and expert witness fees. The mortgagee appealed.

The Third District began it analysis by reiterated the settled principle that Florida follows the "so-called American Rule," under which "attorney's fees may not be awarded unless authorized by contract or statute."

The Court explained that "[b]ecause section 57.105(7) shifts responsibility or attorney's fees, it is in derogation of the common law and must be strictly construed. … The effect of [this section] is to statutorily transform a unilateral attorney's fees contract provision into a reciprocal provision."

However, the Court went on, the statute does not apply where no contract exists between the parties, citing earlier rulings from the Fourth and Fifth District Courts of Appeal.

Because only the parties to a contract can avail themselves of the reciprocity provision in subsection 57.105(7), and because the trial court expressly found that the mortgagee lacked standing because there was no assignment of the mortgage to it and could not enforce the note, the Third District held that the trial court erred in awarding attorney's fees to the borrower "based on a non-existent contract between the parties."

Accordingly, the trial court's order awarding fees was reversed and the case remanded.

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Tuesday, March 21, 2017

The U.S. Court of Appeals for the Ninth Circuit recently reversed an award of summary judgment in favor of a mortgage loan servicer, holding that the evidence could support a verdict that the servicer engaged in an unfair business practice by accepting trial modification plan payments when it had previously determined the borrower was not eligible for a loan modification.

A borrower defaulted on her mortgage loan, and later applied for a loan modification.The mortgage loan servicer sent her a letter offering her a "Trial Plan Agreement."The letter specifically stated, "If you comply with all the terms of this Agreement, we'll consider a permanent workout solution for your loan once the Trial Plan has been completed."The Agreement required the borrower to remit three equal payments of $3,280.05.The borrower signed the Agreement and timely sent the payments.

Later, the servicer informed the borrower that she did not qualify "at this time" for a modification under either the federal Making Home Affordable Program ("HAMP") or under the servicer's in-house modification program because her "income [was] insufficient for the amount of credit [she] requested."The letter also stated that "we may be able to offer other alternatives to help avoid the negative impact" of foreclosure.

The servicer did not provide additional reasons for its denial.However, the servicer had also denied the borrower for a modification because:1) the unpaid principal balance on the loan was higher than the amount allowed under the HAMP Guidelines and 2) the loan failed to satisfy the servicer's net present value ("NPV") test.The servicer's NPV test compared the NPV expected from a modification to the NPV of the unmodified loan.If the cash flow from a viable modification exceeds that of a non-modified loan, HAMP requires a servicer to offer a modification to a borrower.If the NPV test generates a negative result, modification is optional.

The borrower then submitted a second application for a loan modification.

In response to the second application, the servicer sent a letter stating that it "want[ed] to help [the borrower] stay in [her] home" and confirmed receipt and review of the borrower's "verification of income documentation."The servicer also provided three payment coupons in the amount of $2,988.49 with payment deadlines notated and stated: "After successful completion of the Trial Period Plan, [we] will send you a Modification Agreement for your signature which will modify the Loan as necessary to reflect this new payment amount."

Later, the servicer sent the borrower another letter informing the borrower that she was not eligible for a federal HAMP modification "because the current unpaid principal balance on [her] loan [was] higher than the program limit."This letter also stated that the servicer was "happy" to tell the borrower that she "'may be eligible for other modification programs' and that [the servicer] may be able to offer 'other alternatives' to stave off the negative impact a possible foreclosure may have on [her] credit rating, the risk of a deficiency judgment … and the possible adverse tax effects of a foreclosure."

The borrower made all payments called for by the first letter and continued making such payments for a total of seven months.

The borrower was served with a foreclosure notice listing a foreclosure sale date.Prior to the sale date, the servicer sent the borrower another letter encouraging her to continue to seek a modification.The servicer told the borrower that she might "qualify for monetary incentives that will be used to pay down the principal balance of your loan if you make your modified payments on time."

Several months later, the servicer sent the borrower a letter denying her application, stating:"We are unable to offer you a modification through the Home Affordable Modification Program (HAMP) or any [of the servicer's] modification programs … because you did not provide us with the documents we requested."

The borrower then filed an action for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of California's Unfair Competition Law ("UCL"), and violation of the federal Truth in Lending Act ("TILA").

The servicer moved to dismiss the borrower's complaint.The trial dismissed the borrower's TILA claim but denied the servicer's motion with respect to the borrower's remaining claims.The trial court reasoned, "If what [the borrower] alleges is true – that [the servicer's] left hand sought payments from Plaintiff pursuant to a plan designed to give her an opportunity to modify her loan while, notwithstanding [the borrower's] payment in accordance with that plan, [the servicer's] right hand continued all along with foreclosure proceedings and both hands should have known from the start that [the borrower's] loan would not be eligible for modification in any event – the Court can conceive of such allegations stating a [UCL] claim."

Later, the servicer brought a motion for summary judgment.The trial court granted the servicer's motion on the ground that the borrower had failed to provide the servicer with the "requested documentation to support her loan modification request."The trial court also rejected the borrower's breach of contract claims because the borrower had only "conclusorily" asserted that the "modification back-and-forth ripened into a contract with [the servicer]" and remarked that the borrower had not included a breach of contract claim in her first amended complaint.

The borrower appealed.On appeal, the Ninth Circuit reversed the trial court's order granting summary judgment on the borrower's breach of contract claim.

The Ninth Circuit held that the trial court "erred in failing to acknowledge [the borrower's] claim for breach of contract in her pro se complaint."The Ninth Circuit noted that the borrower "explicitly styled her complaint on its first page as one for "BREACH OF CONTRACT AND BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALINGS."The Ninth Circuit also found that "[o]nce [the borrower] made her three payments, [the servicer] was obligated by the explicit language of its offer to send her an Agreement for her signature 'which will modify the loan as necessary to reflect this new payment amount.'[The Servicer] did not call it either a HAMP agreement or [an in-house] agreement, just an 'Agreement.'What program the Agreement was part of is irrelevant."

The Ninth Circuit also reversed the District Court's order granting summary judgment on the borrower's UCL claim.The Ninth Circuit noted that the borrower was indeed ineligible for a HAMP modification, but that "instead of determining eligibility before asking for money – a logical protocol called for by HAMP as of January 28, 2010 – [the servicer] asked [the borrower] for more payments."

The Ninth Circuit held that "[t]he facts in this record would amply support a verdict on this claim in [the borrower's] favor on the ground that she was the victim of an unconscionable process."The Ninth Circuit reasoned that "[w]ith its March 1, 2010 letter, [the servicer] deceptively enticed and invited [the borrower] into a process with the demonstrably false promise that a loan modification was within her reach if she were to make three monthly payments of $2,988.49 each.The next day – and for the first time – [the servicer] eliminated a HAMP modification from its menu, but neither advised [the borrower] what [its in-house modification guidelines] required nor suspended additional payments until it could determine her [in-house modification] eligibility."

Finally, the Ninth Circuit reversed the trial court's dismissal of the borrower's TILA claim.The Ninth Circuit cited the Supreme Court of the United States' ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015) which held that TILA's right to cancel may be exercised by a written notice from the borrower to the lender within three years after the consummation of the transaction, without need to also file a lawsuit within the three-year period.

The Ninth Circuit observed that the Supreme Court decided Jesinoski after the trial court had dismissed the borrower's TILA claim.As a result, the Ninth Circuit remanded the action to the trial court "with instructions to permit [the borrower] to amend her complaint to allege a right to rescind pursuant to Jesinoski."

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Monday, March 20, 2017

The District Court of Appeal of the State of Florida, Second District, recently reversed a summary judgment award in favor of the borrowers in a foreclosure action, finding a triable issue of material fact existed concerning whether the face-to-face counseling requirements of 24 C.F.R. § 203.604 applied, as the mortgagee did not submit evidence "as to whether the mortgagee and loan servicer had a branch office within 200 miles of the property during the time period before three full monthly installments due on the mortgage went unpaid."

A mortgagee filed a foreclosure complaint against the borrowers.During the foreclosure action, the mortgagee assigned the note and mortgage to a different mortgagee.The new mortgagee then substituted into the foreclosure action as the party plaintiff.

The borrowers moved for summary judgment arguing that "Plaintiff failed to comply with the face-to-face counseling requirements of 24 C.F.R. § 203.604."

As you may recall, 24 C.F.R. § 203.604 requires that "[t]he mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid."However, a face-to-face meeting is not required if "the mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either."Id.

In support of their motion, the borrowers submitted an affidavit stating: "I never participated in any face-to-face counseling with Plaintiff," and that they "reside in the property and Plaintiff has a branch within 200 miles of the property (and has had such a branch since the time of the alleged default)."In response, the mortgagee submitted its own affidavit stating that the mortgagee and the prior mortgagee "do not have servicing centers or branch offices located within 200 miles of the subject property."

The trial court granted the borrowers' motion for summary judgment and found that the mortgagee's affidavit addressed only the location of its branch offices and servicing centers at the time of summary judgment.The trial court held that the mortgagee failed to show whether the prior mortgagee had a branch office or a servicing center within 200 miles of the subject property at the time of default.

The trial court then denied the mortgagee's motion for rehearing.In support of its motion, the mortgagee provided an amended affidavit stating that it, the prior mortgagee and the original lender each did not have "servicing centers or branch offices within 200 miles of the subject property three months prior to the alleged default of June 1, 2011."

The Appellate Court reversed the trial court's ruling, and held that "the amended affidavit in opposition to summary judgment filed with the motion for rehearing created a genuine issue of material fact as to whether the mortgagee and loan servicer had a branch office within 200 miles of the property during the time period before three full monthly installments due on the mortgage went unpaid."

The Appellate Court also found that the mortgagee was not precluded from filing an amended affidavit in connection with its motion for rehearing.The Appellate Court relied on Fatherly v. Cal. Fed. Bank, 703 So. 2d 1101, 1102 (Fla. 2d DCA 1997) and noted that "under Florida Rule of Civil Procedure 1.530 a judge has broad discretion to grant a rehearing of a summary judgment when the party seeking rehearing submits matters that would have created an issue precluding summary judgment if they had been raised prior to the hearing on the motion."

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.